Ahead of amendments to the Commercial Act, the pace of share cancellations and disposals of treasury stock is accelerating in the pharmaceutical and biotech industry. As financial authorities push a "third amendment to the Commercial Act" that would mandate the cancellation of treasury shares, corporations are moving to preemptively clear their holdings.
The biggest move came from Celltrion. Celltrion said on the 12th that it would push to cancel about 1.4633 trillion won worth of treasury shares.
Of the roughly 12.34 million treasury shares currently held, the company plans to dispose of the remainder after excluding about 3 million shares set aside for compensation purposes, such as employee stock options.
About 6.11 million shares, or 65% of the total, will be canceled, and about 3.23 million shares, or 35%, will be used as funds to secure future growth engines such as mergers and acquisitions (M&A). The agenda item is scheduled to be submitted to the 35th annual general meeting of shareholders on Mar. 24.
Celltrion has canceled about 1.96 million treasury shares so far after saying last year it would cancel the entire portion of treasury shares it acquired.
The government and the ruling party have been pushing the third amendment to the Commercial Act since last year to resolve the undervaluation of the Korean stock market, the so-called "Korea discount."
The amendment makes it a principle to cancel treasury shares within one year after a company acquires them, allowing exceptions to hold them only when necessary for management, such as employee compensation. It also restricts offering treasury shares as collateral or issuing exchangeable bonds (EB), and includes measures to prevent abuse of control, such as prohibiting the allocation of treasury shares in a spin-off.
The amendment is currently pending before The National Assembly's Legislation and Judiciary Committee, and observers see a chance it could pass the plenary session in the first half of this year. If the bill takes effect, treasury shares will have to be disposed of within a set period, leading to analysis that corporations are moving to strategically clear them in advance through cancellations or compensation.
Other pharmaceutical and biotech corporations are also canceling treasury shares in succession. Yuhan said in a disclosure on the 5th of last month that it decided to cancel 320,836 common shares (about 36.2 billion won). It follows the cancellation of 25.3 billion won worth of treasury shares in May last year.
The company plans to achieve an average shareholder return ratio of at least 30% by 2027. To that end, it will cancel 1% of its treasury shares by 2027 and continue to increase the dividend per share.
Hugel and PharmaResearch also canceled 300,000 shares (53.7 billion won) and 120,000 shares (62.7 billion won), respectively, last year.
Meanwhile, as mandatory cancellation of treasury shares approaches, cases of reciprocal exchanges to secure friendly forces are continuing. While treasury shares carry no voting rights when held by the company, those rights are restored the moment they are disposed of to a third party, a structure seen as a management control defense strategy.
Daewoong recently exchanged shares with Kwangdong Pharmaceutical and then disposed of treasury shares as a contribution in kind to secure equity in U2Bio.
Kwangdong Pharmaceutical also increased friendly equity by reciprocally exchanging treasury shares with companies such as Humedix and Dongwon Systems. Whan In Pharm and Korea United Pharm disposed of treasury shares in a similar way.
The industry expects that if the Commercial Act amendment is realized, financial and governance strategies using treasury shares will change significantly. In the short term, an expansion of treasury share cancellations could be read as a signal to enhance shareholder value, but with various methods such as reciprocal exchanges proceeding in parallel, some forecast that response strategies will diverge clearly by corporation.
An industry official said, "If treasury shares are canceled immediately, the relative equity ratio of the largest shareholder may be diluted and control may weaken, but if they are reciprocally exchanged with another corporation, the shares whose voting rights have come back to life can be converted into friendly equity, strengthening control," while adding, "However, when choosing a reciprocal exchange instead of cancellation, some see it as an attempt to circumvent regulation rather than enhance shareholder value, so future market evaluations and the reactions of minority shareholders will act as variables."